County Expenditures Follow Revenues, Downward

Total Minnesota county expenditures, adjusted for inflation and population growth, have followed county revenues downward over the last ten years. Using data from the 2014 Minnesota County Finances report, published by the Office of the State Auditor (OSA) earlier this year, the first installment in this series explored trends in county revenue from 2005 to 2014. In this article, our attention turns to county expenditures.

As noted in the preceding article, the OSA county finance reports now include information on real (i.e., inflation-adjusted) county revenues and expenditures. This adjustment allows the public to assess changes in county finances over time after taking into account the decline in the purchasing power of the dollar due to inflation. Inflation adjustments in the OSA’s annual county finance reports are based on the Implicit Price Deflator (IPD) for State & Local Government Purchases, which is the preferred index for adjusting state and local government finances for the effects of inflation. The OSA’s most current county finances report shows the trend in county expenditures from 2005 to 2014.

In constant 2005 dollars, total Minnesota county expenditures are the same in 2014 as they were in 2005 ($4.86 billion). However, in between those two dates, real county expenditures increased briefly, before returning to the 2005 level.

From 2005 to 2008, real county expenditures climbed by 10.3 percent, before dropping in subsequent years. This temporary spike was due primarily to increases in capital expenditures—which includes spending for the purchase, construction, or permanent improvements of buildings, equipment, machinery, and land—and debt service payments. The sharp decline in county expenditures from 2008 to 2009 roughly coincides with the bursting of the housing bubble during the depths of the Great Recession.

While real county expenditures in 2014 were approximately the same as in 2005, not all categories of spending remained constant. Total current expenditures for the day-to-day operations of county government declined by 2.0 percent from 2005 to 2014, while capital expenditures declined by 1.3 percent. However, the relatively small category of debt service payments mushroomed by 39.9 percent. Debt service payments grew from 4.6 percent of total county expenditures in 2005 to 6.4 percent in 2014.

The OSA county finances report does not identify specific causes for the spike in debt service payments over this period. County finance experts contacted for this article speculate that the spike may have been due to increases in debt issued to fund road and transit projects and paid for with new dedicated sales tax authority granted to several counties. Whatever the cause of the increase in debt service payments, it was offset by declines in other categories of expenditures, thus resulting in no net increase in real county expenditures from 2005 to 2014.

The most recent OSA county finance report examines trends beginning in 2005. The sharpest decline in county spending occurred over the three year span preceding 2005. Using data from earlier OSA reports, it is possible to examine county expenditures during this period. From 2002 to 2005, real county expenditures fell from $5.46 billion to $4.86 billion in constant 2005 dollars—a decline of 11.0 percent. Seen in this light, the increase in county expenditures from 2005 to 2008 could be viewed as a partial restoration of spending reductions that occurred from 2002 to 2005. The decline in real county expenditures from 2002 to 2005 coincided with a sharp decline in state aid to counties, as described in the preceding article. By 2014, real county expenditures were still 11.0 percent less than they were in 2002.

The need to provide services and infrastructure to support a growing population contributes to growth in county expenditures. Using population estimates from annual OSA county finance reports, it is possible to track the changes in county expenditures on a per capita basis. From 2005 to 2014, county expenditures declined $933 to $891 per capita in constant 2005 dollars—a 4.5 percent drop.

Largely as a result of hefty state aid reductions, county expenditures per capita declined from $1,084 in 2002 to $933 in 2005 in constant 2005 dollars—a 13.9 percent decline. During the entire period from 2002 to 2014, real per capita county expenditures declined by 17.8 percent.

County expenditures in 2014—adjusted for inflation and population growth—are significantly less than they were in 2005 (and 2002). At the same time that real per capita county spending was declining, spending pressures on counties increased, for various reasons noted in the preceding article. Furthermore, the spending decline occurred despite the fact that counties made significant new transit investments over this period.

Increases in county property taxes over the last decade or so may have created the impression that county government in Minnesota was expanding. However, county property tax increases were merely replacing a portion of the reduction in state aid. Information from the Office of the State Auditor make clear that county revenues and expenditures—properly adjusting for inflation and population growth—have been in decline relative to the early years of the century. In other words, Minnesota county government has been shrinking.

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